I am a Senior Fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, I also am a Senior Fellow in International Religious Persecution with the Institute on Religion and Public Policy. I am the author and editor of numerous books, including Foreign Follies: America's New Global Empire, The Politics of Plunder: Misgovernment in Washington, and Beyond Good Intentions: A Biblical View of Politics. I am a graduate of Florida State University and Stanford Law School.

Federal Spending: Killing the Economy With Government Stimulus

English: United States President Barack Obama signs into law the American Recovery and Reinvestment Act of 2009 as Vice President Joe Biden looks on. (Photo credit: Wikipedia)

President Barack Obama’s presidency hangs in the balance after another disappointing employment report. He continues to advocate new government “stimulus” programs to boost his reelection campaign. However, Washington is awash in government “stimulus,” without effect. Only productive private investment will spark economic revival.

When both financial and economic crises hit, President George W. Bush backed a $170 billion “stimulus” bill and then massive industry bail-outs—of banks, Wall Street, automakers, and the housing industry. President Obama accelerated the latter efforts while adding his own $825 billion American Recovery and Reinvestment Act in early 2009. Several smaller “stimulus” efforts costing well over $100 billion followed.

As a result, federal outlays and debts exploded. In 2008 federal red ink was “only” $479 billion. Since then Uncle Sam’s annual deficit has exceeded a trillion dollars. In addition, the Federal Reserve launched a massive “stimulus” campaign—costly bail-outs and mortgage purchases, near zero interest rates, and two rounds of “quantitative easing.” Economist Joseph Stiglitz noted earlier this year that “Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level.”

None of these efforts have spurred economic growth. In fact, unemployment soared, hitting ten percent. The jobless rate is still over eight percent despite administration promises that it would fall below six percent by last April.

Some “stimulus” advocates blame state and local spending which, they claimed, fell. However, Edward Lazear, former chairman of the President’s Council of Economic Advisers, pointed out that while real government spending was down a little in 2010 over 2009, GDP growth rates were higher. Outlays were up in 2011 while GDP growth dropped. Lazear added: “The White House forecasts that government spending in 2012 will exceed 2011 levels by 5 percent and will be 27 percent higher than it was in 2008.”

If government could spend America to prosperity, good times would have arrived long ago.

Yet President Obama won’t stop. Last year he proposed another “jobs” initiative, the $447 billion “American Jobs Act” grab-bag, which included subsidies for state and local governments. Literally millions of jobs, most of them in or for government, would be created, he claimed, by Washington borrowing more money America doesn’t have for government projects America can’t afford.

In July the New York Times published an unintentionally hilarious editorial contending that “Mr. Obama’s big mistake was to turn prematurely from the need for stimulus to a focus on cutting the budget.” The

Times apparently missed the $1.2 trillion deficit the administration will run this year. Or the president’s future budget submission: the Congressional Budget Office estimated that the president’s program would raise accumulated red ink over the next decade from $3 trillion to an astonishing $6.4 trillion. Where is the radical budget-cutting in Washington.

A similar debate is occurring in Europe, with the contest presented as “austerity” versus “growth.” Yet many of the nations which practiced austerity have grown the fastest. Germany remains the continent’s powerhouse even though its post-2008 stimulus was far less relative to its GDP than in the U.S. and other European states. Both Germany and Sweden enjoyed strong growth as they brought their budgets into closer balance.

My Cato Institute colleague Michael Tanner also pointed to the Baltic states of Estonia, Latvia, and Lithuania. All cut government outlays; all are growing. Canada and Switzerland similarly rejected profligacy as policy. He wrote: “All these countries are following the successful examples set by other nations such as Chile, Ireland, and New Zealand in the 1980s and ‘90s, and Slovakia from 2000 to 2003.”

In contrast, Portugal’s Finance Minister, Vitor Gaspar, warned the New York Times: “My country definitely provides a cautionary tale that shows that, in some instances, short-run expansionary policies can be counterproductive.” He added: “There are some limitations to the intuitions from Keynes.” In fact, Portugal may be headed for a second European Union bail-out.

Economic growth requires good spending, not more spending. After all, Washington could pay every American $10,000 to dig a hole in his or her neighbor’s yard and then another $10,000 to fill it in. It would be a ludicrous policy, yet Keynes argued that the unemployed would be better off if paid by the government to “dig holes in the ground.”

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For crying out loud, there IS NO KEYNESIAN MULTIPLIER!!! To paraphrase George Orwell, some ideas are so ludicrous that only an intellectual is capable of believing them, because no ordinary man would be such a fool. The Keynesian multiplier is definitely one such idea. It mistakes division for multiplication, which is something most grammar school children would manage to avoid, but which ivy leaguers apparently can’t grasp. The theory goes that if the government gives me $10,000 to do some project, that $10,000 “multiplies” throughout the economy because I use it to buy materials and hire personnel. Except that it doesn’t. It divides, and only someone with a brain the size of a hydrogen atom should fail to grasp this. If I divvy up the ten grand amongst 20 people, each of them gets some fraction of ten grand, right? All of those fractions of ten grand can only ever add up to ten grand, never more than that. Right? HELLO!?!? Is this thing on?

The only way to multiply wealth is to invest it in such a way as to create more wealth in a self-sustaining manner, such as by opening a business which adds new value to the economy that didn’t exist before by producing goods or services which the market values; in other words, by combining labor and other capital to build wealth. See http://estobrevis.squarespace.com/journal/2011/9/10/john-maynard-keynes-is-dead-viva-hayek.html

Try learning how to form an argument. “Others disagree with you” is not an argument; it is merely a statement of the obvious. “Try thinking for yourself” is an interesting response to a comment which, absolutely and in its entirety, shows independent thinking by virtue of the fact that it is absolutely at odds with the conventional (e.g. Keynesian) wisdom.

Any one with a brain the size of a hydrogen atom can see this. You simply do not understand what a multiplier is.

When the government or anyone puts money into the economy, it certainly does move through the economy. It does go to the suppliers and employees. It goes to local businesses because the people employed by the suppliers, for example, have money to spend in their communities. Seriously. This is basic economics.

I know that blog (or whatever) has you convinced, but lol…again, try thinking for yourself.

Anyone with an economics brain would tell you that when the Gov’t spends $1, it increases GDP by $1, since it doesn’t actually create anything.

But when businesses spend $1, it results in $10 in GDP growth. Why you surely ask? Because in things that create more things, which is where the multiplier comes from. A farmer buys a $1 Million tractor has to create way more in goods than $1 Million. When the gov’t buys a $1 Million tractor, it doesn’t make anything, it just takes away from private sector investment lowering GDP.

LOL. You want to spend more on things that don’t create wealth by taking away from those that do and have the nerve to act like you know what you’re talking about. You’d fit right in on Obama’s economic counsel. The future historical example of economic suicide.

Let’s say the government takes $1 million from the community in taxes, and hires the local unemployed to dig holes in the morning and fill them in in the afternoon. The $1 million goes back into the community when they newly employed diggers buy goods and services. How does this public squander generate a return on the original $1 million.

If all those taxpayers had been able to retain the $1 million and pay down their credit cards, what would have been the return?

Let us say the government borrows the money at 5% for the diggers. At the end of the $1 million, what has been the return for the big dig? Now the community must pay 5% each year in additional taxes to satisfy the creditors. Without a return and a full loss on the initial investment, the community is much poorer.

If the government had borrowed and spent the money on training engineers, at the end of the program what is the return? Well, at least there are some trained engineers.

You are going to tell me that the return in every case is exactly the same as per the multiplier. Well, does it make any sense that it is?

As far as I can tell, the surge of supply side economics blogs being posted in the last few weeks (including this one and one by Laffer) is just related to the upcoming election as conservatives do their best to bolster Romney. As George Bush showed, when things start to fall apart, even Republicans believe in Keynesian economics.

Furthermore, the CBO also believes in Keynesian economics. The fact that the Republicans don’t ever clean out the CBO and replace them all with supply siders indicates that Republicans don’t really believe in supply side economics either. They push supply side policies because it meets their political goals – low taxes for upper income earners and small government.

Mr. Bush’s tax cuts and Medicare Part D devastated the Federal Budget and are responsible for about 50% of the change in debt in the last 10 years. Neither of which seem to bother the contributor as he so charitably calls himself. If the goal is to reduce the deficit, eliminate the Bush tax cuts. But of course that is not the goal, the goal is to cut taxes more, claim to reduce spending (and then spend more) and increase the deficit. Stop complaining about the deficit you advocated creating. It makes you look like an idiot.

Falling military spending and the end of federal stimulus programs are further slowing the already weak U.S. economic recovery.

Recent economic data show that long before the fiscal cliff hits, federal spending already is falling—and taking a toll on the recovery. Federal spending and investment fell at an annual rate of 0.4% in the second quarter and has fallen 3.3% in the past year. Federal employment has fallen by more than 52,000 jobs in the past year and for the first time is lower than when the recovery began.

Such figures understate the full effect of the cuts, as lower federal spending hits military and civilian contractors and cuts into federally backed infrastructure spending at the state and local level. Taken together, the cuts are partially offsetting private-sector growth that, while slow, has been consistent.

“It’s unbelievable how much the economy is getting hurt already by the sharp drop in federal spending,” said Joe LaVorgna, chief U.S. economist for Deutsche Bank.